What is CSDR?
The Central Securities Depositories Regulation (CSDR) entered into force on 17 September 2014 and aims to harmonize the authorization and supervision of central security depositories (CSDs), across the EU and to improve settlement discipline in the securities settlement systems (SSSs) that CSDs operate.
Coupled with TARGET2-Securities (T2S), the harmonization and level playing field objectives of CSDR aims to make cross-border settlement processing and safekeeping more efficient and secure through:
- Shorter settlement periods;
- Settlement discipline measures (mandatory cash penalties and 'buy-ins' for settlement fails);
- Dematerialization for most securities;
- Strict prudential and conduct of business rules for CSDs; strict access rights to CSD services; and
- Increased prudential and supervisory requirements for CSDs and other institutions providing banking services ancillary to securities settlement.
The regulation’s settlement discipline measures impose obligations on:
- Trading venues, to establish procedures that enable confirmation of trade details on the date of execution;
- Investment firms to put in place measures to limit settlement fails; and
- CSDs to establish incentives to encourage timely settlement on the SSS that they operate.
It also introduces penalty fees for failing transactions and forced mandatory buy-ins where a failing participant does not deliver the financial instruments to the receiving participant within four business days after the intended settlement date.
How CSDR affects clients
CSDR aims to achieve much higher levels of standardized settlement in the European market and endeavors to achieve 99% trade settlement efficiency from an unknown point.
CSDR brings in measures to prevent fails, which focuses on the trade confirmations and allocation process, to encourage the use of automated platforms to match transactions on the date of execution. It aims to achieve 99% trade settlement efficiency.
CSDR implemented a T+2 settlement cycle for equities and fixed income transactions executed on trading venues in October 2014. CSDR also introduces a settlement discipline regime under which market participants will be liable to pay penalties or charges against each transaction that fails to settle under the T+2 timeframe. The penalty will be charged daily based on the value of the transaction up until the buy-in period. Under CSDR buy-ins will become mandatory for all asset classes and trade types.
CSDR will also require all securities to be kept in electronic book-entry form.
The majority of market participants support this harmonized settlement disciplinary regime as they believe it will increase operational performance. CSDR is also driving changes to the post-trade landscape. It aims to increase competition in the EU and reduce national boundaries to trading.
Third Country CSDs
Third-country CSDs, which are CSDs outside of the EU jurisdiction, that want to conduct business within the EU must first apply to the European Securities Market Authority (ESMA) for recognition under CSDR if the business falls under the following two categories: (i) if the third-country CSD intends to provide financial instruments governed by the laws of an EU member state or (ii) if it intends to provide its services through a branch in an EU member state jurisdiction.
If a third-county CSD falls under one of these two categories, they must apply for recognition with ESMA within six months of entry to force of relevant technical standards.
How can DTCC help?
DTCC provides a range of services, from Institutional Trade Processing (ITP) through to collateral management, to help clients to meet their obligations under CSDR.
The CTM service, DTCC’s central matching platform, enables clients to meet their T+2 settlement requirements through its automated straight-through-processing (STP) of trades.
CTM provides seamless connectivity from trade execution to instruction, including direct connectivity via FIX from front- to middle-office trade processing as well as via the SWIFT network to a full community of custodian banks for the purposes of settlement notification.
CTM has expanded its Place of Settlement (PSET) matching rules to include all the current T2S national CSDs. CTM trades containing a buy- and sell-side T2S PSET BIC will now match. In addition, the CTM SWIFT MT541/3 messages will include Place of Safekeeping (PSAFE) information when the T2S depositories differ for the buy-side and sell-side trade. PSAFE is crucial information required for cross-border security settlement and this information can be added to the CTM SWIFT message through a simple one-off client subscription change.
To find out more about CTM, visit dtcc.com/ctm
ALERT automatically enriches CTM trades with SSI information by connecting to the world’s largest community of SSI database subscribers. ALERT also provides investment managers and broker/dealers the capability to create and maintain collateral standing settlement instructions (SSIs), enabling real-time enrichment for margin calls within the Margin Transit Utility (MTU).
With the ALERT Global Custodian Direct (GC Direct) workflow, custodian banks and prime brokers can electronically manage SSIs on behalf of their clients via industry standard ISO 20022 compliant messages. This enhances access enables the global custodian/prime broker to become the owner and maintainer of the SSI data, effectively creating a golden copy within the ALERT platform, reducing the likelihood of SSI-related fails.
To find out more about ALERT, visit dtcc.com/ALERT.
DTCC Exception Manager
An "exception" refers to a transaction that requires user attention, to ensure the transaction settles successfully. Post-trade exception processing drives a significant amount of inefficiency for all parties to a trade.
The DTCC Exception Manager platform allows market participants to publish, manage and communicate on exceptions throughout the trade lifecycle process. It centralizes and standardizes exception processing to firstly enable faster resolution, and then deliver a significant reduction in the number of exceptions.
To find out more about DTCC Exception Manager, visit www.dtcc.com/ExceptionManager.
CSDR will require the parties and counterparties to a transaction to be identified by a Legal Entity Identifier (LEI) in their reporting architecture.
The GMEI utility, owned and operated by Business Entity Data (BED) B.V., a wholly owned subsidiary of DTCC, is the largest Global LEI Foundation (GLEIF)-accredited Local Operating Unit (LOU) that provides LEI registrations, renewals and other services to firms in financial transactions globally.
To find out more about the GMEI Utility, visit gmeiutility.org.
As part of an industry-wide effort to reduce collateral settlement fails, DTCC-Euroclear Global Collateral Ltd. (GlobalCollateral)'s Margin Transit Utility (MTU) offers collateral settlement STP by automating enrichment through the ALERT database.
The MTU enables the STP of margin calls, mitigating systemic risk and providing improved liquidity and operational risk management.
To find out more about GlobalCollateral, visit www.globalcollateral.net.
Contact us today to learn more about how DTCC can help you to mitigate the impact of CSDR.
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